What is Inflation?

October 26, 2015

We hear about it all the time – the effects of inflation on the economy. But what exactly does it mean? And what roll does it play in our lives?

Inflation is defined by Investopedia.com as “a sustained increase in the general level of prices for good and services. It is measured as an annual percentage increase.” When inflation is in affect, the value of the dollar goes down.

For example, if the inflation rate is 5% annually, the $1 bill that buys you a beverage today is no longer sufficient in a year because that same beverage will cost $1.05 a year later due to the inflation rate. Inflation occurs when there are more people demanding the same amount of goods or services and therefore prices increase. Also, when the cost of producing a good or service increases, then the cost of these goods or services will increase to offset these production costs and keep profit margins relatively stable.

Inflation is an important aspect of our economy. By understanding this basic feature, we can better understand why the economy and prices fluctuate and how to anticipate future change.